To opt or not to opt ? MONEY
NICHOLAS DAVENPORT
In the faraway days of the 1964 election—what a painfully long three years of financial crisis it has been!—Labour promised cheaper mort- gage loans for house-buyers and `lower interest rates for housing' but wisely did not specify how it would secure them. No doubt it had in mind the two-tier system of interest rates of which I personally, as a disciple of Keynes who first propounded the idea in the early 'thirties, have been an unashamed and ardent advocate. But the conventional dear money policy to which the Government became committed for a variety of non-economic reasons in the defence of the £ made the two-tier system of interest rates seem impracticable except for a certain amount of local authority borrowing from the Public Works Loan Board (initiated, incident- ally, by Mr Maudling).
Then in the spring election of 1966 the Government made a show of redeeming its cheaper mortgage pledge by announcing the so-called `option mortgage scheme.' It bore the marks of a hastily improvised election stunt but Mr Richard Crossman was then Minister of Housing and he had shown by increasing the housing subsidies to allow for the rise in the rate of interest considerable ingenuity and per- sistence in trying to overcome the absurdity of allowing expensive `hot money' from abroad to dictate the cost of our domestic social invest- ment.
The principle of the scheme is simple enough. Interest on a mortgage is deducted from a man's income before his income tax is calculated. Those who pay tax at the full standard rate of 8s 3d in the £ therefore gain more in tax relief than those who pay at only 6s or 4s. Those who pay no tax at all have no relief at all. The scheme is intended to remove this anomaly or injustice. The mortgagor can opt to forego his tax relief and take a lower or subsidised rate of interest which is to be 2 per cent below the normal rate with a minimum of 4 per cent. The average building society mortgage rate at the moment is 7+ per cent, and on that basis the option rate would be 51 per cent. This would give nothing to a man with tax at 8s 3d in the £ for the net rate he would be paying after tax relief would be 4.84 per cent. But with tax at 6s in the £ he would be just gaining, for his net rate after tax relief would then be 5.46 per cent.
So 'the scheme is attractive, as it was intended to be, only to people with modest incomes pay- ing 6s or less in income tax. But there is a snag or agony attached to it. You have to make your decision by the end of December (for relief from April next) and you must opt for the entire length of your mortgage which may be up to twenty-five years or more. You may gain by opting at the moment if you are paying tax at 6s in the £ but your income may rise over the twenty-five years and you may be paying the full standard rate of tax long before half the term is over. You would then be losing over the option. But the Act does not allow you to convert back to the old basis. You are trapped by your initial decision. You are not allowed second thoughts. You will have to see the future clearly—not only the growth of your earning power but the growth of your family, not only the tax you will be paying but the tax the
Chancellor will be levying. Little man as you are today, you will have to wear the mantle of Elijah.
The agonising nature of this personal dilemma must be responsible for the insignifi- cant response which has so far been made to the mass of circulars streaming from the build- ing societies, the life insurance companies, the friendly societies, the local authorities, and the Ministry of Housing. From a few inquiries I made I found that one small building society had received seven applications to `opt' out of 8,000 circularised and another four out of 3,000. Of the big societies it was reported that Leeds had 1,800 applications out of 141,000 borrowers and Woolwich 1,051 out of 166,000.
Ultimately, the value of the option mortgage scheme will depend on the extent to which it can be understood by those who have not yet been able to afford to buy a home on any sort of mortgage. I notice that the general manager of the Abbey National welcomed the scheme on the grounds that it might widen the mortgage market. There must be many thousands in the lower income groups ranging from £800 to £1,200 a year who would like to become owners of their home if they knew how to raise the money cheaply.
It is usually said that a man can afford to spend up to 25 per cent of his gross income on his home, including rates and repairs, but I would prefer to take 20 per cent as a more prudent allocation. On this basis the option mortgage scheme would allow a £1,000-a-year young man to buy a £3,000 home if he were to secure a twenty-five year building society mort- gage repayable on the fixed instalment method. But he would have to be kept away from the Ministry of Housing literature and told to sign on the dotted line at so much a month. The traditional rule is that a man should not have to pay back more in a month than he earns gross a week. This rule would not be broken in the example I quote.
Whether the scheme will actually bring into the mortgage market a new and lower range of incomes will not be known for some time. If it were to succeed it would no doubt put up the price of houses but I doubt whether the building societies will push it. They have their hands full with the higher range of incomes which are their normal mortgage market. In the first half of the year net receipts have been flowing into their treasuries at the rate of £1,200 million a year and this will set the pattern of their mortgage advances. The local authorities and life assurance companies are therefore the only lenders available for an extension of the mort- gage market. The life companies have not yet been organised or encouraged to expand in the mortgage business. The local treasurers, who are prepared to advance up to 100 per cent on a house mortgage, are thus the only source of funds to which the lower income groups could turn on the basis of the option mortgage scheme, but they will surely run up against a rigid Treasury if they seek to increase their borrow- ings from the PWLB. So there is a limit to this gallant, if ill thought out, attempt to reduce the absurdly high rates of interest imposed on our poorest home buyers.
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